Gold and the International Monetary System Rapporteur: André Astrow Gold and the International Monetary System A Report by the Chatham House Gold Taskforce Rapporteur: André Astrow ISBN 9781862032606 Chatham House, 10 St James’s Square, London SW1Y 4LE T: +44 (0)20 7957 5700 E: [email protected] www.chathamhouse.org F: +44 (0)20 7957 5710 www.chathamhouse.org Charity Registration Number: 208223 9 781862 032606 Gold and the International Monetary System A Report by the Chatham House Gold Taskforce Rapporteur: André Astrow February 2012 www.chathamhouse.org Chatham House has been the home of the Royal Institute of International Affairs for ninety years. 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The Royal Institute of International Affairs Chatham House 10 St James’s Square London SW1Y 4LE T: +44 (0) 20 7957 5700 F: + 44 (0) 20 7957 5710 www.chathamhouse.org Charity Registration No. 208223 ISBN 978 1 86203 260 6 A catalogue record for this title is available from the British Library. Designed and typeset by Soapbox, www.soapbox.co.uk Printed and bound in Great Britain by Latimer Trend and Co Ltd The material selected for the printing of this report is Elemental Chlorine Free and has been sourced from well-managed forests. It has been manufactured by an ISO 14001 certified mill under EMAS. ii www.chathamhouse.org Contents The Chatham House Gold Taskforce iv Preface and Acknowledgments v Executive Summary vii 1 Introduction 1 1.1 The international monetary system under scrutiny 1 1.2 The return of the gold debate 2 1.3 The Chatham House Gold Taskforce and the goals of the report 4 2 From the Collapse of the Gold Standard to the Demise of Bretton Woods 6 2.1 Why did the Gold Standard fail? 6 2.2 The rise and fall of Bretton Woods 7 2.3 After Bretton Woods 8 3 Current Challenges for the International Monetary System 10 3.1 The world economy in transition 10 3.2 The buck stops here? 11 3.3 The rise of the renminbi 12 4 Is There a Role for Gold? 15 4.1 Benefits and costs of reintroducing gold in the international monetary system 15 4.2 Gold as an anchor 16 4.3 Gold as a hedge or safe haven 19 4.4 Gold as collateral 26 4.5 Gold as a policy indicator 26 5 Taskforce Conclusions 28 References 30 Appendix 1: About the Taskforce Members 33 Appendix 2: Taskforce Meeting Agendas 36 iii www.chathamhouse.org The Chatham House Gold Taskforce Bill Allen Visiting Senior Fellow, Faculty of Finance, Cass Business School, City University London and a specialist adviser to the House of Commons Treasury committee Forrest Capie Emeritus Professor, CASS Business School, City University London Meghnad Desai Emeritus Professor, London School of Economics Gail Fosler President, GailFosler Group LLC Haihong Gao Director, Research Center for International Finance, Chinese Academy of Social Sciences (CASS) John Gault President, John Gault SA Gerard Lyons C hief Economist and Group Head of Global Research, Standard Chartered Catherine Schenk Professor of International Economic History, University of Glasgow Paola Subacchi Research Director, International Economics, Chatham House Michael Wong Chairman, CTRISKS iv www.chathamhouse.org organizations, private financial institutions and academia from across the world. Taskforce members attended a number of research discussions held at Chatham House and regularly exchanged views by email. The work of the Gold Taskforce is summarized in this Preface and report by André Astrow, the Taskforce rapporteur, who faced the herculean task of bringing together members’ Acknowledgments direct input and reporting their collective, if not specific, views on the topic. The report is an imperfect attempt to distil the richness of the debate in which the Taskforce members have been engaged. Being aware of this intrinsic limitation, the Taskforce members have agreed to make their individual written contributions and presentations Since the 1930s, when Chatham House (the Royal Institute available to interested readers on the Chatham House of International Affairs) convened an International Gold website. Problem Study Group, the international monetary system This report is an important contribution to the debate has always been at the heart of our work. In 2010 on the international monetary system as it provides an the Chatham House report Beyond the Dollar set out independent and unbiased assessment of the benefits some of the ideas that then fed into the agenda of the and limitations of gold. It would not have been possible G20 working group on the reform of the international without the commitment and support of many people monetary system in 2011. In late 2010, partly prompted and organizations. by an article by Robert Zoellick the president of the My thanks go above all to the members of the Taskforce World Bank, in the Financial Times, and partly because (listed on page iv), who gave so much of their time over we felt that the discussion on Special Drawing Rights the course of this project. Members participated in a series in Beyond the Dollar did not extend to an assessment of three external consultation meetings and three study of the role of gold in the basket, we believed that it was groups from March 2011 to November 2011 to discuss time to address in an unbiased and independent way the the role of gold in the international monetary system. A question of whether there is a role for gold in the inter- number of them offered papers and presentations whose national monetary system. ideas were then incorporated in the report. All Taskforce We decided that the best way to address this broad members provided substantive content, data and amend- question was to convene a commission of experts from ments to various drafts of the text and charts. different backgrounds – academia, central banks, the I would like to thank Dr DeAnne Julius, chairman private sector – and different nationalities in order to of Chatham House, for her enthusiastic support for the encourage a more rounded discussion. The Chatham project. Despite being unable to serve on the Taskforce House Gold Taskforce came to life in March 2011 and owing to personal commitments, she provided timely spent almost a year analysing existing research, with advice and expertise, and acted as an important point of members producing their own research to support its reference for the whole project. work and debating many aspects of gold as an element of On behalf of Chatham House, I thank all those organi- the international monetary system. Through this period zations that in different ways supported the work of the the Taskforce was engaged in external consultations (see Taskforce, in particular the Chinese Academy of Social Appendix 2 for the agendas of those meetings) as well Sciences (CASS), and Professor Yu Yongding and Mr as one-to-one discussions with external experts, seeking Zhang Yuyan. We hope that this report does justice to the v views on the topic from the public sector, international confidence they placed in us. www.chathamhouse.org Gold and the International Monetary System I also wish to thank the participants in the three external Research Assistant, provided vital research support across consultations we held in Washington DC, London and a range of complex topics and sources. Jamie Cirrito, Beijing (detailed in Appendix 2). International Economics Administrator, coordinated the Special thanks go to our rapporteur André Astrow, for logistics for all meetings related to this project. Margaret so admirably capturing the sense of the Taskforce's work May, Chatham House Publications Editor, oversaw the and summarizing its conclusions, dedicatedly working editing and the whole publication process as effectively through several drafts of the report to ensure that all as always. The Chatham House Communications team nuances were depicted and each member of the Taskforce was prompt as ever to respond to all media queries about felt that his or her views were correctly represented. the topic. This report would not have been possible without the Finally, I should also thank Benjamin J. Cohen and John contributions of a number of Chatham House staff, to Nugée and two anonymous reviewers for very helpful whom I am very grateful. Nick Maxwell, Programme and comments on drafts of the report. Outreach Manager, led this project from its beginning almost to its completion when he left Chatham House on Paola Subacchi a year’s leave to serve as a member of the UK Territorial Research Director, International Economics, Army. Richard Varghese, International Economics Chatham House vi www.chathamhouse.org carefully assessed in what way bullion could make a positive contribution through intellectually grounded analysis and discussion. In particular, the aim was to fill a gap in the debate on the pros and cons of a fiat money- based international monetary system versus one anchored Executive Summary or partially anchored by gold. In evaluating the advantages and disadvantages of rein- troducing the use of gold in the international monetary system, the Taskforce was fully cognizant of the serious drawbacks of bullion that had led to the demise of the Gold Standard era in the 1930s and the abandonment of In 2011 Chatham House set up a global Taskforce of the Bretton Woods arrangement in 1971.